Commodities Corner

Caveat Emptor, Silver Buyers

Silver prices are set to pop if the Fed announces a new quantitative-easing program at its next meeting in September. Problem is, some of the biggest silver-mining stocks have been tarnished by bad management decisions.

Thank You

Error.

Coins are for collectors. Investors interested in silver should look to the miners. But these days, those miners require a much closer look.

Silver prices have been flat for most of 2012. Prices typically rise when inflation is expected, as it was back in February when silver prices skyrocketed in anticipation of a new Federal Reserve monetary-easing plan. (Prices subsequently crashed when it didn't materialize, and have been flat since.) If the Fed announces a third round of quantitative easing at its next meeting Sept. 12-13, though, silver should receive a major boost.

But finding a pure-play silver miner isn't that easy, and finding one worth investing in is even harder.

Just 30% of the global supply of silver comes from companies that specialize in silver mining. The other 70% is a byproduct of digging up other metals where silver deposits are also often found, such as zinc, lead, copper, and gold.

Primary silver producers have a natural edge on the market: As prices rise, they can increase production and gain market share. Their competitors won't increase supply unless demand for their primary metals rises as well.

"I would expect [silver equities] to perform, at minimum, in line with the metal, and potentially outperform the metal if it's a sustained rally," said Andrew Kaip, an analyst with BMO Capital Markets.

But investors should tread carefully, as some marquee names in silver have been tarnished by some management missteps.

The world's second-largest primary silver producer by volume,
Pan American Silver PAAS -1.962809917355372%Pan American Silver Corp.U.S.: NasdaqUSD9.49
-0.19-1.962809917355372%
/Date(1425412898441-0600)/
Volume (Delayed 15m)
:
1130432
P/E Ratio
N/AMarket Cap
1469405470.67201
Dividend Yield
5.2631578947368425% Rev. per Employee
155682More quote details and news »PAASinYour ValueYour ChangeShort position
(ticker: PAAS), has seen its share price beaten down 28% so far this year, in part because of its purchase of Argentina's Navidad mine. Pan American acquired Navidad in 2010, hoping to negotiate a permit for open-pit mining, which is banned in the region. So far, no such accord has been reached.

Pan American stock should be trading at about $21 a share, of which Navidad would contribute around $5 a share, according to Dahlman Rose analyst Adam Graf. Instead, the stock closed at $15.80 on Friday.

In August 2011, the company missed the deadline for paying its annual fees for mining claims at and near the Rochester property in Nevada. The rights were snapped up by another mining company,
Rye Patch Gold
(RPMGF). "It's bookkeeping," said John Bridges, analyst at JPMorgan Chase. "These things do happen. It's very embarrassing and probably expensive." A court will hear the matter in November. Coeur stock is down 17% so far this year, closing at $19.95 a share.

The Rolls-Royce of the silver space is London-listed
Fresnillo FRES.LN -2.4645717806531113%Fresnillo PLCU.K.: LondonGBP791.5
-20-2.4645717806531113%
/Date(1425422120000-0600)/
Volume (Delayed 15m)
:
2144792
P/E Ratio
0.4197309769286344Market Cap
5979891091.02595
Dividend Yield
0.7555022109917877% Rev. per Employee
248300More quote details and news »FRES.LNinYour ValueYour ChangeShort position
(FRES.U.K.), the world's largest producer of silver. The company's cash-cost for digging silver out of the ground is around $5 a troy ounce. While Fresnillo's $5 excavation cost doesn't include companywide expenses like capital spent on replacing output, the company still makes enough to pay a dividend yield of nearly 4%, well above its peers. The stock closed Friday at $1,581 a share, off 0.75% on the year.

"In the absence of any mistakes by management," Kaip said, Fresnillo will continue to benefit from "good execution, asset quality and growth."